Proposal impacts real estate industry

Ohio legislation has been proposed to close the “LLC Loophole” on real estate transfer taxes. The bill would apply to any transfer of ownership interest in a pass-through entity that owns real estate both directly or indirectly.

“While the change wouldn’t cost a lot for many real estate owners, it is something they need to be aware of,” says Tony Constantine, CPA, tax partner at Ciuni & Panichi, Inc. “Also, if they want to call their state representative to have their voice heard about how this could affect them, now is the time to do it.

Smart Business spoke with Constantine about Ohio’s real estate transfer taxes and how the proposed bill could apply.

What does the current law state with regards to real estate transfer taxes?

The current law imposes a tax on any direct transfer of real property located within the state. The tax consists of a state and county portion, totaling $4 per $1,000 on the transaction, and it’s paid by the transferor. So, a $2.5 million sale would have a transfer tax of $10,000.

The loophole in the current law is that it only applies to direct transfers, not indirect transfers. Indirect transfers are the sale of an ownership interest or entity that owns the property. If you own a building as a single member LLC, you could sell the interest in that LCC to someone else who becomes the owner — doing that is a transfer of an interest in an entity, versus an interest in the actual property.

Why do many real estate investors prefer to purchase real estate indirectly?

There are three main reasons:

1) To shield their identity. Some prefer some privacy with respect to their real estate acquisitions and may purchase through a trust or other entity.
2) To freeze the assessed value for real estate tax purposes. Real estate sales trigger the county to revalue the property to account for any appreciation.
3) To avoid the conveyance fee. When you transfer real property, there is a transfer tax (conveyance fee) that includes a state and county tax. With an acquisition of an LLC interest there is no transfer of title, and thus no transfer tax.

Not everyone sets up their real estate transfers this way, but it happens often. It’s a nuance of the law that not everyone is aware of. It’s also an example of why real estate investors need experts who can advise them on the tax, accounting and legal situation.

Why do some want to close the loophole? Do you think the bill will pass?

They want the extra tax dollars. If you look at how the tax dollars are used, the money — even the state portion — goes to the counties and typically gets allocated to the school systems. So, school boards are big proponents because it will increase their funding. If you look statewide, it could be very beneficial for larger counties, especially since the state has scaled back on its allocations.

The bill is just a proposal, and the likelihood of it passing will become clearer only as it moves through the legislative process. There are arguments to be made on either side. The real estate community could see it as an expensive issue for those with large portfolios.

What does this mean for real estate owners and investors, in practical terms?

If it passes, it won’t stop people from selling a building. The transaction costs could get a little higher, but that’s probably a small line item in most real estate deals. Compliance costs also could go up a little. For example, if you buy a 20 percent interest in a property partnership, there will be some compliance to determine the value of that 20 percent interest.

It would also enable the county to know there was a transfer of real estate, so the assessed value wouldn’t be frozen. However, counties are already getting on top of this by checking the mortgage records.

Really, it’s just a matter of keeping an eye on the situation and making sure your voice is heard if you have an opinion. The real estate market has been steady — and this bill won’t drive that up or down. Northeast Ohio’s cap rates and prices are attractive enough that they’ll continue to draw interest, especially from people outside of the market.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

Factors to consider when choosing a business entity

Choosing a business entity is a big decision. The choice affects how owners are required to conduct business on a day-to-day basis, how financial statements are presented, and what income is taxable and the rate at which the income is taxed. The structure affects the manner in which owners can take cash out of the business and if the cash received from the business is taxable. And it will have long-term effects if or when the time comes to make changes in the ownership structure or sell the business.

Smart Business spoke with Kirk Trowbridge, director at Clarus Partners, about the factors to consider when determining the structure that’s best for a business.

What choices are available to those setting up their business entity and how are they differentiated?

Among the factors that narrow the possibilities are the number and types of owners involved. Ownership structures will dictate whether a company is registered as a single member limited liability company (LLC), partnership, S corporation or C corporation.

It’s important to recognize that just because a person chooses a type of legal entity, it does not necessarily mean the entity will be taxed in the manner that follows that choice. For example, a single member LLC by default would report its income on a Schedule C attached to the owner’s Form 1040. However, that person can make an election with the IRS for the single member LLC to be classified as a corporation and then make an additional election to have it report as an S-corp. with the IRS.

Another limit could be that the ownership structure doesn’t fit the entity. A business cannot be set up as a partnership if there is no partner. S-corps are limited by the number of owners who can be involved in the business and the tax structure of the owners. For example, an S-corp. cannot have a partnership as an owner, but a partnership can have an S-corp. as an owner.

How does someone determine what is the best business structure for their venture?

Many people, when setting up a business, want to know what structure will require them to pay the least amount of tax or put the most money in their pocket. While this can be an important factor, it should not be the primary factor. Rather, first consider what state and federal laws allow. Some business ventures may not be able to conduct business in a manner that is most tax-advantageous because of the makeup of the owners.

Also consider what type of flexibility that’s desired in the operations of the business. Partnerships generally allow the most flexibility while corporations offer the least.

A person should also think about why they are putting the business venture together in the first place. Is the plan to own the entity for five to seven years and then sell it, or is the plan to own the business for a long time?

Choosing the wrong structure can result in paying higher taxes and not having the flexibility that’s desired when conducting business on a day-to-day basis. Long-term, it can also affect how easily change in ownership can take place and how the sale of the business must be structured.

Who should someone work with as they consider which structure is best for their venture?

Work with an attorney and CPA when considering which structure is best for a business. An attorney will make sure the business is set up following state laws, and that all documents and proper registrations with the state have been filed. A CPA can advise the business as to the different options that are available when it comes to structuring the business under current tax law, along with advising on the best structure for income tax purposes.

There are multiple options available when it comes to setting up the structure of a business. Understand all of the choices that are available and the consequence of each before picking one.

Insights Accounting is brought to you by Clarus Partners

Diving into the tax reform, from an individual perspective

Tax reform, commonly referred to as the Tax Cuts and Jobs Act, significantly revised the individual tax code for tax years starting in 2018. But the changes may keep coming, even for tax year 2017, says Tax Managing Director Doug Klein of BDO USA, LLP. The Bipartisan Budget Act, which temporarily resolved the federal budget crisis in February, included tax extenders that were retroactive to Jan. 1, 2017. It permits casualty losses to more than taxpayers residing in federally declared disaster areas, extends business credits, fixes depreciation and adds energy tax credits.

The government will likely continue to issue proposed rules or loophole shutdowns, but, overall, Klein expects Ohioans to come out ahead and pay fewer taxes.

Smart Business spoke with Klein about tax reform and the impact on individual tax returns, starting in 2018.

What are the biggest changes for individual taxpayers under the Tax Cuts and Jobs Act?

The individual tax rates for all taxpayers were lowered, generally as much as a 2 to 3 percent decrease. The top tax rate is now 37 percent (previously it was 39.6 percent).

Several above-the-line deductions were suspended or modified. The deduction for moving expenses has been suspended, except for military members with military orders. For agreements that start as of Jan. 1, 2019, alimony will no longer be a deduction for the paying spouse or includible in income by the receiving spouse. Prior agreements will be grandfathered under the old rules.

Similarly, many itemized deductions have been reduced or suspended beginning in 2018. Congress limited the state and local tax deduction, suspended 2 percent miscellaneous deductions, i.e., unreimbursed employee business expenses, and limited who is eligible to claim a casualty loss. The mortgage interest deduction is now limited to interest paid on acquisition indebtedness of up to $750,000. Mortgages obtained prior to Dec. 15, 2017, are grandfathered under the $1 million limitation. Interest paid on home equity lines of credit, not spent on acquisitions or improvements, are no longer deductible. For tax years 2017 and 2018, however, taxpayers can deduct medical expenses as long as they exceed 7.5 percent of their adjusted gross income.

Congress increased the standard deduction (roughly double the pre-tax act amount) but suspended all personal exemptions. The Alternative Minimum Tax has been retained, but its effects have been severely curbed by eliminating many addbacks. The child tax credits increased, as did the amount that is refundable. In terms of the estate tax, the lifetime estate and gift exemption, and the generation-skipping transfer tax exemption, increase to $11.18 million for all taxpayers, starting in 2018.

Nearly all of these changes affecting individuals are set to expire Dec. 31, 2025.

Who gets the biggest benefit? Who will be hurt the most?

Business owners are big winners. Tax rates for C-corporations dropped to 21 percent from 35 percent. Owners with businesses structured as pass-through entities, such as partnerships and S corporations, who meet stringent requirements, can combine lower individual tax rates with a special deduction.

Taxpayers in high tax brackets who reside in high income tax states, such as California and New Jersey, will see the biggest increases. The new law limits their federal deduction for state and local taxes not attributable to a trade or business to a combined total of $10,000, which includes income and real estate taxes, among others.

How should business owners, investors or high net worth individuals react now?

Many high net worth individuals, and virtually all businesses, are analyzing the impact of the deduction for qualifying business income against the lower C-corp. tax rate, and determining whether their default choice of entity makes sense (S-corp., C-corp. or partnership). CPAs can model various scenarios while considering the multinational impact. Businesses with foreign owners or offshore assets should undertake analysis now, as potential taxes may be due as soon as April 17, 2018.

Individuals should revisit estate planning, including trusts and charitable donation vehicles. Even though the exemption doubled, they can still plan and reduce taxes.

Always keep in mind that tax reform is a moving target, best navigated with persistence and patience.

Insights Accounting is brought to you by BDO USA, LLP

Internal audit can make your company stronger

Although only public companies are required to have documented processes that identify internal controls, all companies could benefit from following a similar approach.

“What company wouldn’t want to know where their problem areas are and develop a plan to fix them?” says Chrissy Walters, principal at Skoda Minotti.

Adopting a risk-based approach starts with the question, “What keeps you up at night?” The answers will guide executives to the risks that need to be addressed.

Smart Business spoke with Walters about the benefits that control oversight and internal audit offers to companies of all types and sizes.

How well do C-level executives understand the risks their companies face?
C-level executives understand the high-level risks, but more granular issues are typically managed by the process owners. For example, an executive may understand the risk of non-compliance to Generally Accepted Accounting Principles (GAAP), but it is the process owner who manages risk mitigation activities such as completing a financial reporting checklist.

The key is to have effective communications so C-level executives are informed of emerging issues and can act accordingly. Internal audit plays a role in the communication cycle by reporting testing results to management and the board of directors.

Where should companies start when setting up control oversight?
Start by documenting existing processes such as accounts receivable, accounts payable, inventory, etc. This is commonly completed in narrative form, which may not capture the process correctly or may not contain an appropriate level of detail.

People tend to skim a narrative and believe that it’s acceptable without considering the underlying control structure. I prefer flowcharts because they provide a visual depiction of the process, with tasks assigned to specific individuals, and highlight controls.

Ideally, each person involved in the process reviews the steps to make sure they are captured correctly and agrees to their role in the control environment. A well-documented process has the added benefit of facilitating a clear understanding for new employees, management and auditors while showing the controls that have been implemented.

Through the documentation process, potential risks, such as segregation of duties conflicts, become more apparent. Process owners can then develop a control program to mitigate identified risks.

Once controls are established, they should be tested through an internal audit testing program to verify they are effective. Process documentation captures information at a specific point in time. It’s important that companies review their process documentation annually to verify that process flows and controls are still valid, or if additional risks and controls should be considered.

What are the benefits of using a third party to conduct an internal audit?
There are three benefits to using third-party internal audit consultants. They provide specific expertise, a more objective perspective and staffing flexibility.

Internal audit specialists are unique in their focus on risk environments and control development. They work with a variety of companies, learn from them, and therefore can share best practices to maximize control effectiveness in a cost-efficient manner.

Auditors work with their clients to challenge the status quo and identify better ways to manage their risk. Solutions could include automating processes, adding new controls, or in some cases eliminating overlapping controls. A different perspective is important because people may be accustomed to the way a company has operated over time, but there may be room for improvement.

A third-party auditing team provides staffing flexibility by taking on special projects, such as enterprise risk management reviews, litigation support and fraud investigations, leaving the company’s staff to focus on their core responsibilities.

Internal audit removes a company’s blindfold so risks can be seen and effective controls can be constructed to help the company become stronger.

Insights Accounting is brought to you by Skoda Minotti

How tax reform changes the financial reporting of corporate taxpayers

The Tax Cuts and Jobs Act introduced major tax reform for corporations, partnerships and business owners.

“Everyone is still trying to wrap their heads around the changes and how they’re going to impact their company today and within the next few years,” says Todd Rosenberg, tax managing director at BDO USA, LLP.

Smart Business spoke with Rosenberg about changes that are already impacting financial reporting for corporate taxpayers.

How will tax reform impact corporate taxes?

Significant changes for corporate taxpayers are the reduction to a flat 21 percent income tax rate, repeal of the corporate Alternative Minimum Tax, interest expense limitation, the treatment of net operating losses, changes to the percentage of bonus depreciation and how foreign earnings are subject to U.S. tax. While most changes weren’t effective until Jan. 1, 2018, some items will impact a company’s ASC 740 calculation for financial statements that include the enactment date of Dec. 22, 2017.

What is ASC 740?

ASC 740 — formerly Statement 109: Accounting for Income Taxes or FAS 109 — provides guidance on recognizing income tax expense in financial statement reporting. ASC 740 presents a company’s current income tax liability owed to authorities and reports an asset or liability for the income tax impact of transactions that have occurred. ASC 740 continues to be a risk area within financial statements.

How will financial reporting change?

Changes or updates to the Internal Revenue Code impact a company’s ASC 740 computation and financial statement reporting. As more guidance is released, companies need to gain an understanding of how those changes will impact them.

Some items will impact Dec. 31, 2017, financial statements. For example, calendar year-end companies that issue financial statements as of Dec. 31 must re-measure their deferred taxes using the reduced rate of 21 percent for deferred balances that will be recognized after Dec. 31, 2017. This could greatly increase or decrease the amount of tax expense reported in the financial statements for the period, depending on a company’s deferred tax position. Also, companies with foreign entities that have unremitted earnings will need to assess those earnings and profits to determine if they need to provide for the repatriation tax. Fiscal year-end companies need to reflect these changes in the quarter that includes the enactment date of Dec. 22, 2017.

Further, companies need to look at how tax reform will impact their first quarter. A lot of documentation and analysis may be required. For example, when a company analyzes its need to record a valuation allowance on its deferred tax assets, it will have to consider the changes to the net operating loss (NOL), carry-forward period and utilization limit, or if the company is subject to the interest expense limitation. These two items could create indefinite lived deferred tax assets.

Also, the 100 percent dividend received deduction could impact a company’s foreign source income when considering the utilization of foreign tax credits.

What if companies don’t have the necessary information for their financial statements?

Given the complexity of the changes, the Securities and Exchange Commission issued SAB 118. It provides guidance on the approach companies may use if the necessary information is incomplete or not available when financial statements are issued. Companies will need to work with their tax professionals to follow this guidance correctly, while planning to update statements as soon as possible or as the information is gathered.

Are there other changes to ASC 740 that businesses need to keep an eye on?

The Financial Accounting Standards Board (FASB) was reviewing comments on a proposed Accounting Standard Update (ASU) focusing on the financial statement disclosures framework for ASC 740. Its purpose is to improve the effectiveness of the disclosures that companies provide in financial statements and give clearer communication on information that is important to financial statement users. The FASB will likely focus on this again once the dust settles from tax reform. This framework will impact public and private companies.

Insights Accounting is brought to you by BDO USA, LLP

Tax reform: Next steps for business owners under the new law

Business owners are trying to determine how the Tax Cuts and Jobs Act will affect them and their companies. But while Congress set an outline, the IRS hasn’t written the rules yet that will determine which businesses qualify for things like the 20 percent deduction for pass-through income, says Jim Komos, CPA, partner-in-charge of tax at Ciuni & Panichi, Inc.

“The uncertainty will probably remain going into the summer,” he says. “Plus, they’re already talking about a corrections bill to fix loopholes that resulted from rushing it through.”

Smart Business spoke with Komos about what’s clear so far about the tax law changes.

The U.S. corporate rate is going from 35 to 21 percent. Are there any downsides to that?

Some small C corporations could be hurt. Before, the first $50,000 of taxable income was taxed at 15 percent; now it all will be taxed at 21 percent. However, C-corps are generally the biggest benefactors of this law.

What changes do business owners need to be concerned about most?

The big concerns are the business interest limitation and the 20 percent deduction for pass-through entities.

Business interest deductions previously had no limit. Now, the government will only let you deduct business interest expense to the extent you have income before that interest expense and depreciation. The change came because of some abuses and the government wanted less risk by business owners who are over-leveraged. For instance, real estate owners with a large mortgage may only be able to deduct two-thirds of that interest expense because they don’t have enough income to justify the full amount. Almost any large business with marginal profits and high debt could be hit by this, such as those with a lot of equipment or inventory.

The other area to watch is whether your S corporation, or flow-through entity, can take a new 20 percent deduction. Previously, 100 percent of income was subject to tax; now with a non-service business or income below a certain threshold, you can take the 20 percent deduction. This could really impact personal tax returns, but there will be complex rules as far as how to compute that deduction and who qualifies for it.

Even if your company will qualify, you’ll want to look closely at the rules. For instance, you may need enough payroll to at least equal the 20 percent deduction. Each case will require individual analysis.

Does that mean business owners may switch from C-corp to S-corp or vice versa?

A lot entities are looking at their structure to see if they should go one way or the other. Some flow-through entities, especially those that wouldn’t qualify for the 20 percent as a service business, for example, are re-examining if should they be a C-corp. However, if you terminate a S selection, you generally can’t make it again for five years.

Remember, though, that mid-March is the deadline for changes, if you’re a calendar-year taxpayer and you want to convert to S-corp for 2018 and make it effective for the whole year. You also need to look into any state and local tax ramifications.

These conversations about ownership structure are always going on, but it has added emphasis with the tax reform bill.

What else should owners look at?

Analyze your improvement plan. You may want to accelerate or change how you deal with your improvements in light of the 100 percent bonus depreciation. (It was previously 50 percent.)

Also, sketch out what 2018 will look like. For instance, you might be in a lower bracket, so you could take more bonus depreciation or be more aggressive in your 2017 accounting. Even though the year is over, you can still do some things with regards to accruals or depreciation methods.

Other changes could affect employees. Employee business expenses are no longer deductible, for instance, and your employees may want to get reimbursed for those expenses or re-structure compensation so the company pays those expenses.

How should business owners handle their personal investments?

The biggest change on investment income is that fees will no longer be allowed as a miscellaneous itemized deduction. Also in general, it’s not as advantageous to itemize. Start planning now for things like charitable contributions.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

How CPAs can help tip the balance toward success in your family business

In family-run businesses, the employees and family members wear many hats, and usually one of these is an accountant’s visor.

“When they are not trained and skilled in accounting matters, misunderstandings and mistakes happen,” says Mark A. Ulishney, CPA, partner at Case | Sabatini.

In many instances, the family business relies upon external assistance from CPAs with general accounting issues, financial reporting and income taxes. As the business grows, executives are usually able to bring in skilled employees to perform more accounting functions.

Smart Business spoke to Ulishney about family businesses’ accounting struggles and where a CPA can provide assistance.

I’ve heard a good CPA will help a family business operate in a professional fashion. How can he or she help the leaders make decisions that are best for the business?

The relationship of a CPA with his or her clients, especially in the case of family businesses, is one of trust and confidence.

Since a quality CPA is well skilled and versed in accounting and tax matters, the family business owners rely upon the CPA’s knowledge, not only in general day-to-day functions, but especially in presenting the best financial picture of the business to financial institutions while reducing the tax bite to the lowest level possible.

When it comes to longevity in a family business, what are the keys to developing a succession plan or exit strategy?

The longevity of a family business is, first and foremost, dependent upon it being successful — both financially and in its community image. It should be a desired provider of products and/or services in its field.

The members that make it successful must pass along the knowledge and skills they have obtained to either the next generation or youthful employees. This is no different than a father and mother passing on their family life skills.

How else can companies use accounting management to better maximize profits and generate more revenue?

A CPA brings experience and skill to the table and can assist family business leaders in devising plans to increase the bottom line. Because the CPA works with several businesses across different industries, he or she has a broad base of knowledge as to what has worked and what has not, and can provide suggestions of what actions would work to the business’s benefit.

There is always a cost/benefit approach to any business decisions and each business is unique in that endeavor and analysis.

How should a family business seek out a CPA?

Word-of-mouth referrals are a great place to start, and business owners should always interview a prospective CPA before engaging them. If the family business is a member of a chamber of commerce or industry-specific association, it would pose a great opportunity to network within those groups and perhaps familiarize themselves with a CPA who works with businesses in its industry.

In what areas should family business owners consult with their CPA on an ongoing basis?

The family business should not hesitate to consult with their CPA if there is uncertainty in accounting matters. Most importantly, they should keep their CPA in the loop as to what they are doing.

The last thing a CPA wants to see happen is for the client to make uninformed business decisions or to take actions that the CPA only finds out about after year-end. At that point, the CPA has not only lost the ability to plan, but also the ability to correct any mistakes. The CPA can only mitigate the financial damage.

Specific areas where the CPA should be consulted are obviously major business purchases or sales, and of course, income taxes. Other items the CPA can assist with include debt financing, lease versus purchase, employee benefit plans, software evaluation and utilization, payroll matters and more.

If there is only one takeaway from this discussion, it is to plan — with your CPA — before enacting financial business decisions.

Insights Accounting is brought to you by Case | Sabatini

As tax presence expands, nexus studies become more important

Where companies do business, and the definition of “doing business,” seems as if it should be obvious given the attention most pay to revenue, marketing and sales efforts. However, not all companies are aware of the states and cities in which they have nexus, especially as those entities look to impose digital or “cookie” nexus to capture as much tax revenue from those doing business in their jurisdictions.

“A company is considered to have nexus when it has a significant enough connection with a state — connection being defined in a number of ways — for that state to impose its laws on the company,” says Jeff Stonerock, tax director at Clarus Partners. “This is most often used with respect to a company’s tax liability.”

This is why a nexus study is important. It’s a review of the company’s activities to determine if they meet the requirements under a particular state’s laws to require the company to file tax returns and pay taxes owed to that state.

Smart Business spoke with Stonerock about tax nexus and how to use nexus studies to determine tax liability.

How is a nexus study run and what should companies know when it’s done?

A nexus study is executed by gathering the facts surrounding the operations and locations of the work and sales of a company. It involves payroll and sales records, and meetings with key personnel.

Companies should realize that not only is current information important, but where the company will or expects to be operating and selling in the future is important as well.

What companies should be sure to conduct a nexus study?

Any company that has activities outside of the city and/or state in which the company is physically located should conduct a nexus study to understand its tax obligations. Typically, activities that create nexus are sales; people, specifically their physical presence in another city or state, as well as their activity; property; or subcontractors working on behalf of the company in a city or state outside of the company’s home base.

What should companies know about cookie nexus and how to account for their presence where these laws are on the books?

All states have different rules related to cookie nexus, also referred to as click-through or affiliate nexus, which in one way or another refer to a company’s digital sales activities. It is important to know that what has traditionally been considered a physical presence in a state to create nexus may no longer be the limit of the definition. Companies that have a digital presence in another state could be required to file returns and pay taxes in that state.

When undertaking a nexus study, companies should be sure to explore their digital presence, especially any digital sales activities, and understand the laws in the states where transactions have occurred.

Who should be on the team that runs a nexus study?

The most important people are the CFO, the head of operations and the human resources lead. The numbers of the business are important, but where and how the business operates as well as where the people are located and working is equally as important in a nexus study.

Companies should work with their accounting professional to understand the filing requirements of the states, including estimated payments and filing dates to make sure they follow all laws going forward. In addition, they should understand what items from their business may require them to file taxes in another state.

How often should companies run a nexus study?

Run a nexus study every year in which business activities in a state increase significantly based on the original nexus study. If the nexus study is performed correctly, a business should have a plan in place to review its activities as they increase in a new state. The subsequent nexus study should take just a couple of hours to perform each year going forward.

Companies that have a growing business and have not performed a nexus study in five years or more should contact their tax professional to ensure their business does not have tax liabilities in other states from the ever-changing state tax laws.

Insights Accounting is brought to you by Clarus Partners

New tools for accountants can help protect companies from cyber threats

The digital threats facing organizations today have multiplied as they move their data hosting from localized servers to the cloud. Further, myriad devices, such as smartphones, tablets and laptops are accessing that data, many of which are not a company’s property, but are owned by employees. That’s made protecting all that data, and securing all the possible entry points, a significant task.

Coming to the aid of organizations in the fight against cyber threats are accountants who, with a new reporting tool, are able to help companies identify areas of vulnerability in their cyber defenses.

Smart Business spoke with Ryan Bidlack, IT Senior Manager at Barnes Wendling CPAs, about how accountants are helping companies with cybersecurity.

What are the major threats to an organization’s digitally stored information?
While the types of attacks have multiplied and evolved, what has remained much the same is the threat posed by internal employees. It’s not necessarily a rogue or malicious employee intent on doing harm to the company that is the problem.

Instead, it’s people who are unaware of the potential harm of clicking on a malicious link, falling for a phishing scam, or unwittingly downloading malware. Because employees can access the network from anywhere at anytime, if an unauthorized user gets access to their account, they can steal confidential data, client information, or anything that’s housed on the company’s network.

Outside devices pose a major threat. While the trend of Bring Your Own Device has certainly helped productivity, it’s become a means through which malware or viruses can find a way into a company’s network.
It’s tough to manage everything that comes into a company’s network these days. There isn’t one solution companies can use to protect themselves, rather it takes a multifaceted approach.

How well are companies defending themselves from these digital threats?
How well a company protects itself varies significantly between organizations. Based on the general success of ransomware and other high-profile attacks, no company should feel as if their systems are safe.

It’s a good idea to have risk assessments and system testing done annually by an outside entity. The American Institute of Certified Public Accountants, in 2017, introduced System and Organization Controls (SOC) Reporting for Cybersecurity to assist organizations in the fight against cyber threats.

It’s designed to examine, assess and report on various internal controls, and create greater efficiency by identifying redundant or ineffective controls. Some accountants have in-depth IT knowledge and are capable of performing an SOC Cybersecurity engagement. They not only have broad knowledge of existing threats, but they also stay current on threat protection methods.

What is cybersecurity and who needs a cybersecurity program?
Cybersecurity encompasses any software, hardware, processes or procedures designed to protect a network’s systems and data from any unauthorized access.

Any organization with an internet connection and data on its servers and workstations needs a cybersecurity program.

Some companies don’t think they’re at risk because they don’t process credit cards, but all companies could have personally identifiable data on their employees, such as Social Security numbers and protected health information. They also could have sensitive customer information or data —all businesses use emails, which contain a wealth of information. Companies that are storing any of this must protect access to that data.

How can accountants help companies address cyber threats?
SOC Reporting for Cybersecurity is a tool CPAs can use to provide companies with an opinion on their risk management program, including the effectiveness of their controls. It’s a unique reporting mechanism for CPAs  who are bound by AICPA guidelines, and adhere to standards subject to peer review.

All organizations need to continuously assess their cyber risk proactively rather than reactively. While an organization might feel safe because it hasn’t been hit by a cyberattack, chances are it will be, or already has been hit and doesn’t know it. ●

Insights Accounting is brought to you by Barnes Wendling CPAs

How a cost segregation study can focus your fixed asset strategy

Has your business acquired, constructed or substantially improved a building recently? You may want to get a cost segregation study to develop a strategy around capitalizing your fixed assets. It could allow you to accelerate depreciation deductions, to ultimately reduce taxes and increase cash flow.

Tony Constantine, CPA, a tax partner at Ciuni & Panichi, Inc., says, unless you’re in the business of owning real estate, you may not be aware of the benefits of a cost segregation study. In fact, some accountants don’t understand how these studies can provide savings.

“You don’t even have to be the property owner. A major tenant that does a large build-out could take advantage of this if they own the improvements,” he says.

Smart Business spoke with Constantine about cost segregation studies, depreciation and how they apply to your fixed assets.

How can a cost segregation study reduce your company’s taxes?

IRS rules generally allow business owners to depreciate commercial buildings over 39 years. They can depreciate structural components — walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building.

Companies often allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Personal property, depreciable over five or seven years, can include removable wall and floor coverings, detachable partitions, awnings and canopies, window treatments, signage and decorative lighting. In addition, certain items qualify if they serve a business function. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms. Land improvements — fences, outdoor lighting and parking lots — are depreciable over 15 years.

A cost segregation study applies engineering methods to quantify the building materials, reconciling that to the purchase price. It uses statutes and case law to determine how items can be depreciated.

What other tools can apply to fixed assets?

The tangible property regulations provide a framework for determining when to capitalize an expense and when to expense it.

Additional incentives amplify the benefits of putting a strategy around your fixed assets. Section 179 allows for an immediate expensing of tangible personal property, such as desks and equipment. That limit was $500,000 in 2017, but under the Tax Cuts and Jobs Act, it jumps to $1 million in 2018.

Another incentive is bonus depreciation, where employers write off a percentage of the cost basis of an asset with the first-year depreciation. Prior to the new tax law, a 50 percent bonus depreciation was available for new property. Now, any asset, new or used, acquired from Sept. 27, 2017, to 2023 can be written off at 100 percent.

What else should business owners know about creating a fixed asset strategy?

Don’t just look at the hypothetical benefit; consider the whole picture. How do you maximize the provisions and use them to get the biggest benefit? You might be in a situation where, depending how the ownership is structured, if you create losses, they’ll be limited. So, paying $10,000 for a study and an extra depreciation deduction doesn’t make sense. Other times, a study might increase cash flow by $50,000 but cost $10,000. Some people will think that’s great and they’ll do it. Others won’t think that’s enough margin to go through the hassle.

Apply a global strategy — not only for this year, but next year and beyond. Your tax adviser can look at your situation, tax rate structure and the provisions that are applicable to see where and when your company gets the biggest benefit. But you also need to provide a clear picture, if you plan to sell an asset in five years, rather than keep it for the full term, that changes the modeling and potential benefits.

If you already invested in depreciable buildings or improvements, it may not be too late to take advantage of a cost segregation study. A ‘look-back’ study allows you to claim missed deductions in qualifying previous tax years. You can also review your depreciation schedule to see if equipment, for example, is in the wrong asset class.

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